Tag Archives: alliances

Sam Whelan penned a report on the alliance of four companies managing terminals at the Kwai Tsing terminals in Hong Kong.

Apparently shippers are furious. They believe there will be collusion and rates will rise as a result. Rates are already higher in Hong Kong than the mainland, and the Hong Kong fees add more cost.

The firms say it’s only to make the port more efficient and gain higher throughput. Volume handled has been declining in 2018 compared to the prior year.

It’s true that greater cooperation would most likely improve port throughput. Coordinating yard movements and berth use would offer possibilities for gains. I’m not sure it would have to be at the level of fixing prices. Improving port and yard bottlenecks is an important activity for firms in port management today.

But you can bet shippers will be on their guard for any collusion on pricing, especially when there’s a falling need for services. And since it’s China that is involved– these are Chinese firms– we can’t rule out geopolitical considerations that would be collusive. WE need to watch this one and see how the volumes and prices play out, just like the shippers will.

My colleagues Chris Clott, Rob Cannizzaro and I just published a paper in the Journal of Shipping and Trade. In it we propose a new standard called ServiceTerms for classifying container cargo on six ACTION dimensions which are relevant to downstream supply chain service and performance (and to some extent upstream actions). The six dimensions are

Accessorial

Customer Service

Transport

Inventory

Orders and paperwork

None of the above.

ServiceTerms would function something like INCOTERMS in supply chain contracts. They would provide a standard which every participant in the supply chain– ocean, rail and truck carriers, port terminals, warehousing, drayage, distribution, and so on– would know about in advance and determine how they were going to handle the goods to meet the standard. The standard includes a specification of limits on the time spent in each step of the journey, based on the total length in time committed to. These time standards would allow each of the actors to plan their operations to meet their time requirement. Aiming for the standard would coordinate the supply chain actors with only limited need for them to work together except on the handoffs. (And these are typically between just two adjacent players in the network.) The actors in the chain would be enabled to innovate their own individual techniques to meet their goals.

Like INCOTERMS there would be no specific penalties for failure. However, there would be measurement and reporting of performance (time in service) at each stage of the end-to-end delivery. Individual contracts could provide penalties, negotiated by the participants; everyone involved could keep track of whether a participant was doing his or her bit to meet the standard; or whether some were agreeing to a standard with less than total commitment to making it happen for individual cargoes.

Alliances have been touted as supply chain improvements because they coordinate a few ocean carriers on legs of a journey. But supply chain thinking tells us what matters is the overall source to destination performance, and that requires more involvement, particularly from downstream players such as rail, barge, truck, warehouse, and “last mile”. To improve their abysmal service performance, alliances have to find ways of coordinating the entire delivery process. A standard for the process that shippers, handlers, and carriers can agree and coordinate on is a central element.

We see alliances as entities capable of incubating the ServiceTerms standards, much as the International Chamber of Commerce does for INCOTERMS. ServiceTerms could then be included in a standard contract for delivery. The specifics of the ServiceTerms standard should be negotiated during the incubation process; and the process should allow for individual variations by contract, much as INCOTERMS do.

If the majority of cargo went according to the standard, all the supply chain players would work together to make sure the overall term was met. That should improve everyone’s focus on the goal of making customer service a standard rather than an exception in the container business.

What’s the truth? Some experts say that terminals must be able to handle giant ships and therefore few customers, or fail. Olaf Merk (of the OECD) says it looks like a ‘monopsony’; a port has only one or very few customers. Actually according to Alan Manning [1], who ‘wrote the book’ on monopsony, a monopsony simply means that there is little elasticity of supply (of incoming containers i.e. ships) for the port.

The classic monopsony situation occurs in labor supply; the ‘company town’. It used to be seen in mining and very early, in manufacturing. In a company town, if you want to work, you have to work for the one employer. The firm must raise wages for all employees if it needs more than are available at the town. If it needs fewer employees, it can drop wages. Manning’s book defines labor monopsony as any case in which the labor supply (of workers) is inelastic (relatively vertical supply curve) while labor demand by the employer is elastic (downward sloping demand for labor).

What makes for inelastic labor supply? In the company town it happens because workers feel they don’t have mobility flexibility– it’s too far to the next place to work. But monopsony can happen for lots of reasons– discrimination, for one, can limit workers’ ability to get a different job. In fact, any condition that prevents workers from seeking other work, and thereby constricting individuals’ market for jobs, suffices. Examples include safety on the job, or most recently in the news, forcing truck drivers to lease their trucks through a drayage firm. The huge lease obligations pin the drivers to the job, and they lose control of work conditions and in the case of trucking, pay scales as well, since the drayage work in US ports is often piece work rather than (often unionized) pay by the hour.

In the port example the port is the labor supply– if the port is forced to upgrade to support ULCC ships in the 17-20KTEU range, it will be captive to those carriers that wish to run those big ships to it. These consume so much port capacity that the port will not be able to solicit other jobs from smaller ships. If it does, congestion will result. The very few carriers calling there with their ULCCs will demand lower prices to land, and the port ‘wage’ will decline. That naturally also affects their profitability.

And the ports that don’t adapt to the large ships will not be able to get work at all, or nowhere near as much. It’s like the people living too far from the company town (on the remote farms) who will fall out of the labor market for that firm.